Tax bill demonstrates our nation's upside down fiscal priorities

Now that Congress has passed the Tax Cuts and Jobs Act (TCJA), it’s time to take a step back from its regressive and mistargeted tax rules to appreciate the new law for what it really is: an even more regressive and mistargeted spending policy.

Milton Friedman famously observed that “to spend is to tax.” There are two thoughts bundled up here. First, when government spends money, it necessarily commits itself to pay for that spending through taxation.

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The taxes can come now, or they can come later. In the latter case, we talk about current deficits, but those deficits are just earmarks for the future taxes that must be imposed to pay down the national debt incurred to fund the earlier spending.

Second (although not emphasized by Friedman), the ordering is important. Government exists to spend, not to tax: Taxation is just how government finances our collective spending priorities. Government spending is the principal glue that binds each of us to all fellow Americans.

It is the vehicle through which we articulate our shared values and pursue those collective investment or insurance opportunities that actually matter enough to us that we are willing to pay for them. What’s more, government spending ordinarily is very progressive in its distributional impact: The poor get more out of free public schools than do the rich.

If it is true that to spend is to tax, then it also follows that to cut taxes today is to slash spending tomorrow. That is the fundamental problem overlooked in our fixation on the TCJA as an exercise in tax efficiency or tax fairness.

Ask yourself, how would the TCJA have fared if it had been presented as a new $1.5 trillion spending program that by design would crowd out existing government spending priorities? Or alternatively, a new deficit-financed spending program that eventually would be paid for by higher taxes on future generations? Was this the best way, the smartest way, to spend that $1.5 trillion?

In passing the TCJA, the Republican Congress committed itself through the budget process to cut future government spending (or, more improbably, raise future taxes) to accommodate the top-heavy priorities of the TCJA — corporate tax rate cuts, further evisceration of the estate tax, cuts to the top tax rate paid by America’s highest income families and a bizarre giveaway to owners of “pass-through” businesses, by itself costing us all some $414 billion over the next 10 years.

The inevitable Procrustean second step will be to cut actual government spending to make room for this new lower ceiling on government financing — or to impose new broad-based taxes.

That is the case, of course, because the Republican majority had already committed to spend the lion’s share of the $1.5 trillion on subsidies for the most affluent, in the form of the TCJA’s tax cuts.

Rational public debate about the TCJA’s explicit and implicit priorities might have brought out the fact that, contrary to our mythology, the United States is a low-tax, small-government country. Among 35 Organization for Economic Cooperation and Development (OECD) countries, only South Korea, Ireland, Chile and Mexico have lower tax revenues relative to their respective GDPs.

These priorities will not change until we understand that taxation is not tantamount to setting our money on fire, but rather finances important mutual investment and insurance programs that can drive substantial economic growth.

Our country’s largest asset class — the largest driver of our economy — is ourselves; returns to labor amount to about two-thirds of our GDP. Yet, we systematically underinvest in the public education of talented kids from poorer communities, because we still rely too heavily on local financing of public education.

We underinvest as well in higher education, somehow thinking it normal to graduate young adults from universities encumbered with debts running into the hundreds of thousands of dollars.

A recent study by Standard & Poor’s found that, if we, like many other developed countries, had accessible high-quality universal child care programs, women would play larger roles in our workforce, and our GDP today would be as much as $1.6 trillion higher. And the same points can be made about physical infrastructure and basic science.

The ultimate reason why the new tax bill won’t pay for itself is that it is precisely the wrong medicine, the economic equivalent of bloodletting to cure a fever. We require more collective investment in ourselves, not less.

The $1.5 trillion squandered through the new tax law could have been invested in human and physical capital, setting us on a new course of economic growth and shared prosperity.

Instead, we will move toward greater inequality and a permanently lower growth path, precisely because we failed to appreciate that well-designed government spending in our advanced, low-tax economy is both progressive in effect and growth-enhancing.

Edward D. Kleinbard is the Robert C. Packard trustee chair in law at the USC's Gould School of Law, and a fellow at The Century Foundation. Kleinbard was one of four individuals honored as 2016 International Tax Person of the Year by the nonpartisan policy organization Tax Analysts.